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The FTC recently required divestitures in two merger investigations (here and here), based largely on the majority’s conclusion that

[when] a proposed merger significantly increases concentration in an already highly concentrated market, a presumption of competitive harm is justified under both the Guidelines and well-established case law.” (Emphasis added).

Commissioner Wright dissented in both matters (here and here), contending that

[the majority’s] reliance upon such shorthand structural presumptions untethered from empirical evidence subsidize a shift away from the more rigorous and reliable economic tools embraced by the Merger Guidelines in favor of convenient but obsolete and less reliable economic analysis.

there is no basis in modern economics to conclude with any modicum of reliability that increased concentration—without more—will increase post-merger incentives to coordinate. Thus, the Merger Guidelines require the federal antitrust agencies to develop additional evidence that supports the theory of coordination and, in particular, an inference that the merger increases incentives to coordinate.

The unifying theme of the unilateral effects analysis contemplated by the Merger Guidelines is that a particularized showing that post-merger competitive constraints are weakened or eliminated by the merger is superior to relying solely upon inferences of competitive effects drawn from changes in market structure.

It is unobjectionable (and uninteresting) that increased concentration may, all else equal, make coordination easier, or enhance unilateral effects in the case of merger to monopoly. There are even cases (as in generic pharmaceutical markets) where rigorous, targeted research exists, sufficient to support a presumption that a reduction in the number of firms would likely lessen competition. But generally (as in these cases), absent actual evidence, market shares might be helpful as an initial screen (and may suggest greater need for a thorough investigation), but they are not analytically probative in themselves. As Josh notes in his TRW dissent:

The relevant question is not whether the number of firms matters but how much it matters.

The majority in these cases asserts that it did find evidence sufficient to support its conclusions, but — and this is where the rubber meets the road — the question remains whether its limited evidentiary claims are sufficient, particularly given analyses that repeatedly come back to the structural presumption. As Josh says in his Holcim dissent:

it is my view that the investigation failed to adduce particularized evidence to elevate the anticipated likelihood of competitive effects from “possible” to “likely” under any of these theories. Without this necessary evidence, the only remaining factual basis upon which the Commission rests its decision is the fact that the merger will reduce the number of competitors from four to three or three to two. This is simply not enough evidence to support a reason to believe the proposed transaction will violate the Clayton Act in these Relevant Markets.

Looking at the majority’s statements, I see a few references to the kinds of market characteristics that could indicate competitive concerns — but very little actual analysis of whether these characteristics are sufficient to meet the Clayton Act standard in these particular markets. The question is — how much analysis is enough? I agree with Josh that the answer must be “more than is offered here,” but it’s an important question to explore more deeply.

Presumably that’s exactly what the ABA’s upcoming program will do, and I highly recommend interested readers attend or listen in. The program details are below.

At issue is how pro-competitive efficiencies should be considered by the agency under the Merger Guidelines.

As Josh notes, the core problem is the burden of proof:

Merger analysis is by its nature a predictive enterprise. Thinking rigorously about probabilistic assessment of competitive harms is an appropriate approach from an economic perspective. However, there is some reason for concern that the approach applied to efficiencies is deterministic in practice. In other words, there is a potentially dangerous asymmetry from a consumer welfare perspective of an approach that embraces probabilistic prediction, estimation, presumption, and simulation of anticompetitive effects on the one hand but requires efficiencies to be proven on the other.

In the summer of 1995, I spent a few weeks at the FTC. It was the end of the summer and nearly the entire office was on vacation, so I was left dealing with the most arduous tasks. In addition to fielding calls from Joe Sims prodding the agency to finish the Turner/Time Warner merger consent, I also worked on early drafting of the efficiencies defense, which was eventually incorporated into the 1997 Merger Guidelines revision.

The efficiencies defense was added to the Guidelines specifically to correct a defect of the pre-1997 Guidelines era in which

It is unlikely that efficiencies were recognized as an antitrust defense…. Even if efficiencies were thought to have a significant impact on the outcome of the case, the 1984 Guidelines stated that the defense should be based on “clear and convincing” evidence. Appeals Court Judge and former Assistant Attorney General for Antitrust Ginsburg has recently called reaching this standard “well-nigh impossible.” Further, even if defendants can meet this level of proof, only efficiencies in the relevant anticompetitive market may count.

The clear intention was to ensure better outcomes by ensuring that net pro-competitive mergers wouldn’t be thwarted. But even under the 1997 (and still under the 2010) Guidelines,

the merging firms must substantiate efficiency claims so that the Agency can verify by reasonable means the likelihood and magnitude of each asserted efficiency, how and when each would be achieved (and any costs of doing so), how each would enhance the merged firm’s ability and incentive to compete, and why each would be merger-specific. Efficiency claims will not be considered if they are vague or speculative or otherwise cannot be verified by reasonable means.

The 2006 Guidelines Commentary further supports the notion that the parties bear a substantial burden of demonstrating efficiencies.

As Josh notes, however:

Efficiencies, like anticompetitive effects, cannot and should not be presumed into existence. However, symmetrical treatment in both theory and practice of evidence proffered to discharge the respective burdens of proof facing the agencies and merging parties is necessary for consumer‐welfare based merger policy

There is no economic basis for demanding more proof of claimed efficiencies than of claimed anticompetitive harms. And the Guidelines since 1997 were (ostensibly) drafted in part precisely to ensure that efficiencies were appropriately considered by the agencies (and the courts) in their enforcement decisions.

But as Josh notes, this has not really been the case, much to the detriment of consumer-welfare-enhancing merger review:

To the extent the Merger Guidelines are interpreted or applied to impose asymmetric burdens upon the agencies and parties to establish anticompetitive effects and efficiencies, respectively, such interpretations do not make economic sense and are inconsistent with a merger policy designed to promote consumer welfare. Application of a more symmetric standard is unlikely to allow, as the Commission alludes to, the efficiencies defense to “swallow the whole of Section 7 of the Clayton Act.” A cursory read of the cases is sufficient to put to rest any concerns that the efficiencies defense is a mortal threat to agency activity under the Clayton Act. The much more pressing concern at present is whether application of asymmetric burdens of proof in merger review will swallow the efficiencies defense.

It benefits consumers to permit mergers that offer efficiencies that offset presumed anticompetitive effects. To the extent that the agencies, as in the Ardagh/Saint-Gobain merger, discount efficiencies evidence relative to their treatment of anticompetitive effects evidence, consumers will be harmed and the agencies will fail to fulfill their mandate.

This is an enormously significant issue, and Josh should be widely commended for raising it in this case. With luck it will spur a broader discussion and, someday, a more appropriate treatment in the Guidelines and by the agencies of merger efficiencies.

“A significant development in 2010 was the issuance of updated Horizontal Merger Guidelines by the federal antitrust agencies. The 2010 Guidelines advance merger analysis by eliminating the need to define a relevant market and determine industry concentration at the outset.”

Compare with Commissioner Rosch’s reported remarks at the Spring Meeting:

“I want to emphasise: I don’t care what the 2010 guidelines say, you can never do away with market definition,” Rosch said.

Does the latter statement assert that the HMGs do not require market definition at all? If so, the statement in the former that the agencies don’t need to do it first certainly follows. And why is it an “advance” to eliminate the need to define a market first but seems to be a bad thing to eliminate it altogether in certain cases? Of course, as DOJ (and, importantly, UCLA Bruin) economist Ken Heyer points on in his remarks at the same Spring Meeting event, and I’ve written about here and here, most expect the agencies to continue defining markets because federal courts expect it, may require it, and failure to do so will harm the agencies’ ability to successfully bring enforcement actions. Nonetheless, the statements do not provide much clarity on the Commissioner’s (or, for that matter, Commission’s) views with respect to the new HMGs and the role of market definition.

Over at the DOJ, on the other hand, former Chief Economist Carl Shapiro — congratulations to the newly appointed Fiona Scott Morton — made clear that agencies’ stance on the role of market definition:

“The Division recognizes the necessity of defining a relevant market as part of any merger challenge we bring.”

No such announcement from the FTC. And Commissioner Rosch’s remarks do not clarify matters. On the one hand they seem to indicate the FTC will always define markets; on the other, they imply that they do so despite the fact that the Guidelines say they don’t have to. With Shapiro gone, the DOJ view is unclear at the moment. Perhaps all of this is much ado about nothing as a practical matter — though I’m not sure of that. But if the Agencies both consider market definition a “necessity,” why not just say so? Why not write: “market definition is required by Section 7 of the Clayton Act and the agencies will, at some point in the analysis, define a relevant market”?

Market definition requirement aside, my views on the positive developments in the new Merger Guidelines and the larger problem they present — asymmetrically updating theories of competitive harm without doing so on the efficiencies side — articulated in this forthcoming paper.

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Several years ago, the DOJ cleared a merger between Whirlpool and Maytag. The primary defense was that post-merger prices could not rise because of intense competition from foreign competitors like LG and Samsung. Apparently the actual competition was more than Whirlpool wanted to bear. Guess What? Mr. Laissez-Faire Antitrust, meet Dr. Public Choice. The Wall Street Journal has reported that Whirlpool has filed a dumping complaint against LG and Samsung. Whirlpool’s dumping complaint involves refrigerators and the merger concerns involved washers and dryers more than refrigerators. But, the complaint sends a signal to LG and Samsung. The comlaint also certainly does raise a caution about relying on foreign competition, and suggests a potential remedial provision.

One criticism of the unilateral effects analysis in the 2010 Merger Guidelines is that demand curves are kinked at the current price. A small increase in price will dramatically reduce the quantity demanded. One rationale for the kink is that people over-react to small price changes and dramatically reduce demand. As a result of this behavioral economics deviation from standard rational behavior, it is claimed, merging firms will not raise prices when the merger increases the opportunity cost of increasing output. (The opportunity cost increases because some of the increased output now comes from the new merger partner.) It has been argued that such kinks are ubiquitous, whatever the current price is. For some recent views on this issue, see the recent anti-kink article by Werdenand the pro-kink reply by Scheffman and Simons.

A story in today’s New York Times nicely illustrates one of the problems with the kinked demand story. Instead of raising prices, consumer products firms can and commonly do raise per unit prices by reducing package sizes. Changes in package sizes do not create a disproportionate reaction, perhaps because they are less visible to busy shoppers. Whatever the reason, this smaller package size raises the effective price per unit while avoiding the behavioral economics kink. Of course, this is not to say that firms never raise prices; they do. Moreover, even a kink did exist for reasons grounded in behavioral economics or menu costs, any kink likely is just temporary. In contrast, a merger is permanent.

It is for these reasons that this kinked economics has gotten much traction in the current debate. But, these presumptions do not mean that kinked economics arguments can never be raised in a merger. If there were evidence of a low pass-through rate of variable cost into higher prices over a significant period of time, that evidence would be relevant to a more refined analysis of upward pricing pressure.

Thank you to @senorrinhatch for recognizing that "uncertain patent rights will lead to less innovation because drug companies will not spend the billions of dollars it typically costs to bring a new drug to market..." https://truthonthemarket.co